The re-appointment of ‘pre-October 26 Government’ and passing of the Vote of Account in Parliament, and with the political uncertainty that prevailed over the last 8 weeks easing off, has provided financial capability for the Government and its institutions to function beyond 2018 according to a report by First Capital Research.

“Over the last 3 months (25-Sep to 24-Dec) we’ve maintained exposure at 50% considering earnings hit via depreciation and political unrest affecting sentiment of the market. However, during the period market gained by about 100-120 index points.”

“As we step into 2019, we are witnessing the global fund flow reversing towards Asia and commodity prices crashing with the dip in oil prices benefiting the BoP position of Sri Lanka and positively affecting Cost of Living.”

We believe the events that have unfolded may benefit Sri Lanka and the equity market over the next few months positively impacting earnings and possibly leading to net foreign inflows.

“We assume the impact of the policy rate hike which took place in Nov 2018 to materialise during the 1Q2019 thus improving the overly sluggish credit growth and GDP growth levels thereby providing room for the two rate cuts in 2019,” it stated.
Meanwhile, USA Fed reserve officials raised interest rates for the fourth time in 2018 by increasing the rate by 25bps, boosting the benchmark federal rate to 2.50% in December 2018. Policy makers signalled they may soon pause their monetary tightening campaign by trimming the number of rate hikes they foresee in 2019, to two from three.

Sri Lanka must accelerate broad-based structural economic reforms without further delay to accelerate its current sluggish economic growth momentum, the Central Bank of Sri Lanka (CBSL) said on Friday. In its December monetary policy meeting statement, CBSL noted that the reduction of the Statutory Reserve Ratio (SRR) at the last monetary policy review in November 2018 released around Rs 90 billion of rupee liquidity to the banking system.
The Monetary Board of the Central Bank of Sri Lanka, at……its meeting held on 27 December 2018, decided to maintain policy interest rates at their current levels. Accordingly, the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) of the Central Bank will remain at 8.00 per cent and 9.00 per cent, respectively.
The full monetary policy meeting statement is reproduced below:
“Monetary Policy Review: No. 8 – 2018
The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 27 December 2018, decided to maintain policy interest rates at their current levels.

Accordingly, the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) of the Central Bank will remain at 8.00 per cent and 9.00 per cent, respectively. The Board considered current and expected developments in the domestic economy and the domestic financial markets as well as the global economic environment, with the broad aim of stabilising inflation at mid single digit levels in the medium term to enable the economy to achieve its potential growth.
Subpar economic growth continued in the third quarter of 2018
As per the provisional estimates of the Department of Census and Statistics (DCS), the Sri Lankan economy recorded a modest real GDP growth of 2.9 per cent, year-on-year, during the third quarter of 2018, compared to the revised growth of 3.6 per cent in the second quarter of 2018.

As per the available economic indicators and other economic developments, real GDP growth is likely to be low in the fourth quarter of 2018 as well, before picking up gradually in 2019. The continued low economic growth reemphasizes the need for implementing broad based structural reforms without further delay.
Notwithstanding the elevated market interest rates and rupee liquidity deficit, private sector credit growth accelerated
The reduction of the Statutory Reserve Ratio (SRR) at the last monetary policy review in November 2018 released around Rs 90 billion of rupee liquidity to the banking system. However, the liquidity deficit has widened thereafter, and the Central Bank continued its Open Market Operations (OMOs) cautiously to manage liquidity on overnight, short-term and long-term basis as appropriate.

Given high credit growth and foreign exchange market developments, overnight interest rates in the money market have been maintained close to the upper bound of the policy rate corridor. Other market interest rates remained at elevated levels, both in nominal and real terms.
In spite of the increased cost of funds and tight liquidity conditions, the year-on-year growth of credit to the private sector accelerated since September 2018, partly reflecting the private sector advancing its activities in anticipation of measures by the government and the Central Bank to curb excessive import growth. Nevertheless, with the contraction in net foreign assets of the banking system, the year-on-year growth of broad money (M2b) remained within the expected levels.
Favourable outlook for inflation in the near term
Headline inflation, based on both the National Consumer Price Index (NCPI) and the Colombo Consumer Price Index (CCPI), remained in low single digit levels.

Core inflation also remained subdued thus far in 2018. Recent downward adjustments to fuel prices and selected administratively determined prices, as well as the reduction of Special Commodity and telecommunication levies, along with the ongoing recovery in the agriculture sector are expected to impact favourably on inflation in the near term.

Volatile global commodity prices, possible weather-related disruptions to domestic supply chains due to unpredictable weather patterns, and the possible pass-through of the effect of the rupee depreciation in recent months to domestic prices pose risks to the inflation outlook. The current projections show that inflation, on average, will remain below 5 per cent in 2019 and stabilise in the range of 4-6 per cent thereafter with appropriate policy adjustments.
External sector continues to face international and domestic headwinds
The trade deficit widened further in the first ten months of 2018 with the expansion in import expenditure outpacing the growth of export earnings.

However, a moderation in import expenditure is expected, in response to the measures adopted to curb imports of motor vehicles and non-essential goods as well as the impact of the depreciation of the rupee.
While earnings from tourism continued to grow, a slowdown in workers’ remittances was observed. In the financial account, both the government securities market and the Colombo Stock Exchange experienced net outflows of foreign investment, although marginal inflows have been observed in December.
The widening trade deficit, tight conditions in the global markets and excessive speculation in the domestic market exerted pressure on the exchange rate, and the Sri Lankan rupee depreciated by 15.9 per cent against the US dollar thus far during 2018 up to 27 December. Meanwhile, gross official reserves amounted to US$ 7.0 billion at end November 2018, providing an import cover of 3.7 months.
Policy interest rates maintained at current levels
Although inflation remains subdued and economic growth remains below potential, the Monetary Board of the Central Bank was of the view that it is appropriate to continue the current monetary policy stance to stabilise overall economic conditions and domestic financial markets in a context where there has been an uptick in private sector credit as well as continued pressure on external reserves. Accordingly, the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels.” (IG)

The First Capital Group consists of First Capital Treasuries PLC, First Capital Limited, First Capital Markets Limited, First Capital Asset Management Limited and First Capital Equities (Private) Limited covering Colombo, Negombo, Matara, Kandy and Kurunegala.

First Capital is an investment bank offering services as Stock Brokers in Sri Lanka. The Company acts as a conduit between retail and institutional clients and the secondary market of the Colombo Stock Exchange. First Capital’s best-in-class research team provide a series of actionable trade recommendations, daily and periodic market commentaries and publications for Stock Brokers in Sri Lanka.

* “The central bank is unlikely to cut this time, in order to protect reserves and the rupee,” says Dimantha Mathew, head of research at First Capital in Colombo. “Otherwise more foreign selling will be triggered,” he said

* Four analysts surveyed by Bloomberg expect the central bank to hold policy rates at 9%

* Foreign funds bought a net $1.9m of stocks on Wednesday, helping par outflows in December to $25.9m: exchange data; the market is on track for a six month of outflows

* Yield on 11.5% govt bonds due December 2021 rose 3bps to 11.51% on Wednesday

Dec 28, 2018 (LBO) – First Capital Research has upgraded its equity exposure to 60 percent with the belief that the events that have unfolded globally may benefit Sri Lanka and the equity market over the next few months positively impacting earnings and possibly leading to net foreign inflows.

Over the last 3 months, they have maintained exposure at 50 percent considering earnings hit via depreciation and political unrest affecting the sentiment of the market. During the period, however, the market gained by about 100-120 index points.

“As we step into 2019, we are witnessing the global fund flow reversing towards Asia and commodity prices crashing with the dip in oil prices benefiting the BoP position of Sri Lanka and positively affecting the cost of living,” the firm said.

First Capital Research has also upgraded ASPI volatility expectations to 6,000-6,500 (from previous 5,800 – 6,200), assuming Market PER to be 8.5x – 9.5x.

The firm, however, expects the divergent views between the President and UNF government to continue to affect key policy decisions within the cabinet throughout 2019, up until the Presidential elections due in Jan 2020.

Global growth is expected to slow down during 2019 primarily led by the possible impacts arising out of the trade war between the US and China coupled with the downgrade in growth expected in the US economy.

“The slowdown in the US economy is likely to result in decelerating the Federal Reserve’s interest rate normalization process which may provide some breathing space for weaker Asian economies.“

First Capital Research further said that global fund flow has already started to reverse towards Asia and emerging markets providing a reasonable level of stability to Asian and other emerging markets.

In the secondary market, the yield curve witnessed a notable downward shift during the week with the gradual easing off of political instability, while the bullish sentiment was further supported by the results of the weekly Treasury bill auction held on 19 December, where weighted averages on the 182-day and 364-day maturities decreased by 4 basis points each for the first time in three weeks.
Further, the overall market witnessed moderate to large volumes, as market participants remained active amidst volatility in yields. Heavy buying interest was dominated by local counter-parties, completely absorbing foreign selling pressure. Meanwhile, the weekly T-bill auction on 26 December wasn’t held; the next auction will be held on 2 January 2019.

Liquidity & CBSL Holdings
CBSL market liquidity remained negative throughout the week, while widening the liquidity gap and recording the lowest liquidity for the week on 24 December, amounting to Rs 103.9 billion. CBSL holdings remained almost stable during the early part of the week and spiked to Rs 272.8 billion on 26 December.

Foreign Interest
Foreign holding was recorded at Rs. 175.4 billion, recording a drop of Rs. 670.0 million. Overall Government Securities increased by 1.1%, while foreign holding percentage for the week remained stable at 3.5%.

Maturities for next week
The Government Securities Market has a Treasury bill maturity amounting to Rs. 15.0 billion and bond interest amounting to Rs. 44.8 billion to be settled on the week ending 4 January 2019.

Daily Summary
Thursday (20.12.18): With the political instability easing off, the secondary market yield curve was seen slightly shifting downwards, while overall market witnessed moderate volumes.
Buying interest was seen on the short end of the curve with [01.08.21] and [15.12.21] trading at 11.55%-11.65% levels, while mid-tenure maturities [15.05.23] traded at 11.75%. At the long end of the curve, [01.08.26] and [15.06.27] were seen trading at 11.85%-11.90% levels.
Friday (21.12.18): Continued buying interest witnessed from local counterparties shifted the secondary market yield curve slightly downwards across the board, while overall market witnessed moderate volumes.

Short- to mid-tenure maturities traded at intraday lows on the following maturities: [01.03.21] at 11.36%, [01.05.21] at 11.40%, [01.08.21] at 11.45%, [15.10.21] at 11.45%, [15.12.21] at 11.47%, [15.05.23] at 11.57%, [15.07.23] at 11.62%, [01.08.26] at 11.65% and [15.06.27] at 11.70%.
Monday (24.12.18): The secondary market yield curve remained mostly unchanged with low volumes amidst sluggish market participation. Short- to mid-tenure maturities traded at the following rates: [01.03.21] at 11.35%, [01.08.21] at 11.45%, [15.12.21] at 11.48%, [15.05.23] at 11.60%, [01.08.26] at 11.68% and [15.06.27] at 11.75%.
Wednesday (26.12.18): The secondary market yield curve remained almost unchanged, while the overall market witnessed large volumes with a mix of activities, amidst foreign selling offsetting local buying. In the absence of a T-bill auction, short tenure maturity [15.12.21] changed hands at 11.50-60% levels while mid-tenure maturities, [15.05.23] traded at 11.60-70% levels and [01.08.26] traded at 11.65-75% levels. (FCH PLC)

The First Capital Group consists of First Capital Treasuries PLC, First Capital Limited, First Capital Markets Limited, First Capital Asset Management Limited and First Capital Equities (Private) Limited covering Colombo, Negombo, Matara, Kandy and Kurunegala.

First Capital is an investment bank providing a full range of financial advisory and services. The Company’s research deliver heightened perspective in fundamental research aiding Share Market Investment in Sri Lanka. The Company’s best-in-class research team provide dynamic reports including economic reviews and proprietary research, encompassing fundamental, quantitative and technical analysis. With fundamental research coverage of 62 listed securities (reflecting approximately 65% market capitalization) across 15 sectors in Share Market Investment in Sri Lanka.

The First Capital Group consists of First Capital Treasuries PLC, First Capital Limited, First Capital Markets Limited, First Capital Asset Management Limited and First Capital Equities (Private) Limited covering Colombo, Negombo, Matara, Kandy and Kurunegala.

First Capital’s Dimantha Mathew with the Market Review on Ada Derana

First Capital is an investment bank offering services as Stock Brokers in Sri Lanka. The Company acts as a conduit between retail and institutional clients and the secondary market of the Colombo Stock Exchange. First Capital’s best-in-class research team provide a series of actionable trade recommendations, daily and periodic market commentaries and publications for Stock Brokers in Sri Lanka.

The First Capital Group consists of First Capital Treasuries PLC, First Capital Limited, First Capital Markets Limited, First Capital Asset Management Limited and First Capital Equities (Private) Limited covering Colombo, Negombo, Matara, Kandy and Kurunegala.

First Capital is an investment bank offering services as Stock Brokers in Sri Lanka. The Company acts as a conduit between retail and institutional clients and the secondary market of the Colombo Stock Exchange. First Capital’s best-in-class research team provide a series of actionable trade recommendations, daily and periodic market commentaries and publications for Stock Brokers in Sri Lanka.

First Capital is an investment bank offering services as Stock Brokers in Sri Lanka. The Company acts as a conduit between retail and institutional clients and the secondary market of the Colombo Stock Exchange. First Capital’s best-in-class research team provide a series of actionable trade recommendations, daily and periodic market commentaries and publications for Stock Brokers in Sri Lanka.

The First Capital Group consists of First Capital Treasuries PLC, First Capital Limited, First Capital Markets Limited, First Capital Asset Management Limited and First Capital Equities (Private) Limited covering Colombo, Negombo, Matara, Kandy and Kurunegala.

First Capital’s Dimantha Mathew with the Market Review on Ada Derana

First Capital is an investment bank offering services as Stock Brokers in Sri Lanka. The Company acts as a conduit between retail and institutional clients and the secondary market of the Colombo Stock Exchange. First Capital’s best-in-class research team provide a series of actionable trade recommendations, daily and periodic market commentaries and publications for Stock Brokers in Sri Lanka.